Protect Your Children From Themselves With A Spendthrift Trust

People rarely handle newly acquired wealth well. Everyone has heard stories of the lottery millionaires who have blown it all, and professional athletes who become bankrupt shortly after their careers end. Unfortunately, for many, sudden wealth without financial aptitude often ends badly.

Within my financial planning practice I often work with families whose children eventually will inherit very significant wealth. We greatly encourage, and assist parents, with “the money talk.” That said, often “the talk” alone isn’t going to instill instant financial responsibility. Fortunately, there are available provisions within trust documents that might be of help.

One of the more common techniques is to name a trust with a “spendthrift provision” and other protective clauses as the beneficiary of your assets. These types of trusts, often referred to as an Asset Protection Trust, can be created currently (inter vivos) or upon death through your will or testamentary. Under this type of arrangement, generally, the trustee or trustees are given broad discretionary powers to provide beneficiaries with funds – income and/or principal – to maintain their lifestyle, without allowing them direct access to the principal. For example, Mom and Dad can establish a trust for the benefit of a child who spends injudiciously and shows signs of being financially irresponsible.

An Asset Protection Trust or, simply, a fully discretionary trust with spendthrift provisions, will prevent the beneficiary from using the trust’s assets to purchase Ferraris for his new best friends. As with most trusts, the life of the trust can be for the beneficiary’s lifetime or for a planned number of years. When a trust is established it can provide for both discretionary distributions by the trustee and contain provisions for the release of funds over a beneficiary’s lifetime via mandatory distribution provisions.

There are other significant benefits to having a trust as the beneficiary for your assets, such as protection from creditors and potentially safeguarding assets should a beneficiary experience a bankruptcy or divorce. While a trust with mandatory distributions generally would not be the most protective or creditor proof, it may be desirable under certain circumstances and additional safeguards can be placed that allow the trustee to withhold distributions.

While trusts offer many planning advantages, they are complex vehicles and requiring professional advice and possible ongoing administrative and professional costs. However, with the right planning they can help you provide a seamless, protective transition to the next generation.